Shareholder Value In The Third Wave Of Acquisitions

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Michael Hergert

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Abstract

Acquisition activity in the United States has occurred in three distinct waves. During the 1960s, acquisitions were predominantly made in areas unrelated to the acquiring firms. Later analysis of this conglomerate boom generally indicated that little or no shareholder value was created in this process. A second wave of acquisition and divestiture activity in the 1980s was characterized by the unwinding of the conglomerates and a search for synergy between the buyer and the acquired firm. The evidence on value creation for this period is somewhat more encouraging, although most studies indicate that firms did not succeed in creating profits through acquisitions. A third wave of acquisitions occurred in the late 1990s. This was an unprecedented era of merger and acquisition activity. Nearly $4 trillion worth of mergers occurred from 1998-2000. This represents a volume of activity greater than the previous 30 years put together. This study examines the returns to acquiring firms during this period and compares them to previous studies of acquisition performance. Was it different this time? This study indicates that shareholder value was generally reduced in making acquisitions, although some factors can mitigate the degree of poor performance. On average, acquiring firms lost 4-7% from making acquisitions. There is evidence to support the conventional wisdom that firms often overpay making acquisitions and that the size of the stock premium can be tied to firm performance. However, after controlling for the price premium, there is significant evidence of wealth creation (synergy) from the transaction.

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